BIOS

Bank of Canada holds trend-setting interest rate at 1%

Steve Rennie, The Canadian Press
Published Wednesday, September 4, 2013 10:04AM EDT
Last Updated Wednesday, September 4, 2013 12:19PM EDT

OTTAWA -- The Bank of Canada is holding its main interest rate at one per cent, where it has been since September 2010.

Economists widely expect the central bank to hold its trendsetting rate steady well into next year, so Wednesday's announcement came as no surprise.

"The bank did precisely what was expected of them today: nothing," BMO Capital Markets chief economist Doug Porter said in a note to investors.

"If anything, the tone of the statement was slightly more dovish, noting the more moderate global backdrop, less certainty on the output gap and still relatively relaxed on the household debt front.

"The bottom line is that we are still looking at a very long period of inactivity by the bank, and may well be talking about four years of unchanged rates a year from now."

That wait-and-see approach would appear to suit Bank of Canada governor Stephen Poloz just fine. He has been on the job since early June and shows no sign of breaking from the monetary policies of his predecessor, Mark Carney, who took up a new post this summer as head of the Bank of England.

"Add it all up and this is a central bank that believes that growth will pick up in 2014 and that will eventually require higher rates, but which is happy to sit on the sidelines and wait for substantial proof such an acceleration is underway before raising rates," CIBC World Markets economist Avery Shenfeld said in an investors' note.

"We still look for the first hike in early 2015, with some risk of a move late in 2014 if there are upside surprises to our forecast."

In the explanatory note to Wednesday's announcement, the Bank of Canada said it intends no changes as long as considerable slack remains in the economy, inflation remains muted and household finances continue to improve.

Sluggish exports and business investment have slowed the country's economic growth, the bank said.

"Uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment."

To underscore that point, new figures Wednesday from Statistics Canada showed the country's exports fell to $39.2 billion in July, down 0.6 per cent from the month before.

At the same time, imports grew slightly, to push the country's merchandise trade deficit with the world to $931 million in July from $460 million in June.

Meanwhile, the Bank of Canada noted the housing sector has been slightly stronger than anticipated, while household credit has continued to slow and mortgage interest rates are higher, the bank added, all of which point to "a continued constructive evolution of household imbalances."

The bank also said the global economy has less momentum than anticipated.

"In Europe, there are early signs of a recovery and Japan's situation remains promising," it said.

"In a number of emerging market economies, financial volatility has increased, adding uncertainty to growth prospects, although China continues to grow at a solid pace."

While commodity prices have been relatively stable, the bank says geopolitical tensions -- which presumably include the bloody conflict in Syria and the continued unrest in Egypt -- are raising the global price of oil.

The bank took a slightly dimmer view than it has previously of short-term economic growth in the United States, said RBC assistant chief economist Dawn Desjardins.

"While today's statement incorporated a slightly less optimistic view of the near-term outlook for U.S. growth and acknowledged that in turn, a firming in Canadian export and business investment was evolving slower than projected, the main thresholds required for the bank to start to reduce the amount of stimulus remained intact," she wrote in an investors' note.

The bank's next rate announcement is scheduled for Oct. 23.

Related Links

Photos

Stephen Poloz (centre) poses with Finance Minister Jim Flaherty (left) and Mark Carney after being named as the next Governor of the Bank of Canada during a news conference in Ottawa, Thursday, May 2, 2013. (Adrian Wyld / THE CANADIAN PRESS)